Table Of ContentAdditional Information on Cognitive Biases by Alireza Etemadi
Additional information on cognitive
biases by Alireza Etemadi
During this article you can read and learn more about each cognitive
bias.
This tendency was not in any of the psychology texts I once examined, at least
in any coherent fashion, yet it dominates life. It accounts for the extreme result
in the Milgram experiment and the extreme success of some cults that have
stumbled through practice evolution into bringing pressure from many
psychological tendencies to bear at the same time on conversion targets. The
targets vary in susceptibility, like the dogs Pavlov worked with in his old age,
but some of the minds that are targeted simply snap into zombiedom under
cult pressure. Indeed, that is one cult's name for the conversion phenomenon:
snapping.
What are we to make of the extreme ignorance of the psychology textbook
writers of yesteryear? How could anyone who had taken a freshman course in
physics or chemistry not be driven to consider, above all, how psychological
tendencies combine and with what effects? Why would anyone think his study
of psychology was adequate without his having endured the complexity
involved in dealing with intertwined psychological tendencies? What could be
more ironic than professors using oversimplified notions while studying bad
cognitive effects grounded in the mind's tendency to use oversimplified
algorithms?
I will make a few tentative suggestions. Maybe many of the long-dead
professors wanted to create a whole science from one narrow type of
repeatable psychology experiment that was conductible in a university setting
and that aimed at one psychological tendency at a time. If so, these early
psychology professors made a massive error in so restricting their approach to
their subject. It would be like physics ignoring astrophysics because it couldn't
happen in a physics lab, plus all compound effects. What psychological
Additional Information on Cognitive Biases by Alireza Etemadi
tendencies could account for early psychology professors adopting an over-
restricted approach to their own subject matter? One candidate would be
Availability-Misweighing Tendency grounded in a preference for easy-to-
control data. And then the restrictions would eventually create an extreme
case of man with a hammer tendency. Another candidate might be
Envy/jealousy Tendency through which early psychology professors displayed
some weird form of envy of a physics that was misunderstood_ And this
possibility tends to demonstrate that leaving envy/jealousy out of academic
psychology was never a good idea. I now quit claim of all these historical
mysteries to my betters.
The quantity of man's pleasure from a ten dollar gain does not exactly match
the quantity of his displeasure from a ten-dollar loss. That is, the loss seems to
hurt much more than the gain seems to help. Moreover, if a man almost gets
something he greatly wants and has it jerked away from him at the last
moment, he will react much as if he had long owned the reward and had it
jerked away. I include the natural human reactions to both kind of loss
experience — the loss of the possessed reward and the loss of the almost-
possessed reward —under one description, Deprival Superreaction Tendency.
In displaying Deprival Superreaction Tendency, man frequently incurs
disadvantage by mis-framing his problems. He will often compare what is near
instead of what really matters. For instance, a man with $10 million in his
brokerage account will often be extremely irritated by the accidental loss of
$100 out of the $300 in his wallet.
The Mungers once owned a tame and good-natured dog that displayed the
canine version of Deprival Super-reaction Tendency_ There was only one way
to get bitten by this dog. And that was to try and take some food away from
him after he already had it in his mouth. If you did that, this friendly dog
would automatically bite. He couldn't help it. Nothing could be more stupid
than for the dog to bite his master. But the dog couldn't help being foolish.
He had an automatic Deprival Superreaction Tendency in his nature.
Humans are much the same as this Munger dog. A man ordinarily reacts with
irrational intensity to even a small loss, or threatened loss, of property, love,
Additional Information on Cognitive Biases by Alireza Etemadi
friendship, dominated territory, opportunity: status, or any other valued thing.
As a natural result, bureaucratic infighting over the threatened loss of
dominated territory often causes immense damage to an institution as a
whole. This factor among others, accounts for much of the wisdom of Jack
Welch's long fight against bureaucratic ills at General Electric. Few business
leaders have ever conducted wiser campaigns.
Deprival Superreaction Tendency often protects ideological or religious views
by triggering and hatred directed toward vocal nonbelievers. This happens, in
part, because the ideas of the nonbelievers, if they spread, will diminish the
influence of views that are now supported by a comfortable environment
including a strong relief-maintenance system. University liberal arts
departments, law schools, and business organizations all display plenty of such
ideology-based groupthink that rejects almost all conflicting inputs. When the
vocal critic is a former believer, hostility is often boosted both by:
a) a concept of betrayal that triggers additional Deprival Superreaction
Tendency because a colleague is lost, and
b) fears that conflicting views will have extra persuasive power when they
come from a former colleague.
The foregoing considerations help account for the old idea of heresy, which
for centuries justified much killing of heretics, frequently after torture and
frequently accomplished by burning the victim alive.
It is almost everywhere the case that extremes of ideology are maintained with
great intensity and with great antipathy to non-believers, causing extremes of
cognitive dysfunction. This happens, I believe, because two psychological
tendencies are usually acting concurrently toward this same sad result:
Inconsistency-Avoidance Tendency, plus Deprival Superreaction Tendency.
One antidote to intense, deliberate maintenance of groupthink is an extreme
culture of courtesy, kept in place despite ideological differences, like the
behavior of the justices now serving on the U.S. Supreme Court. Another
antidote is to deliberately bring in able and articulate disbelievers of
incumbent groupthink. Successful corrective measures to evil examples of
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groupthink maintenance have included actions like that of Derek Bok when, as
president of Harvard, he started disapproving tenure appointments proposed
by ideologues at Harvard Law School.
Even a one-degree loss from a 180-degree view will sometime create enough
Deprival Superreaction Tendency to turn a neighbor into an enemy, as I once
observed when I bought a house from one of two neighbors locked into
hatred by a tiny tree newly installed by one of them.
As the case of these two neighbors illustrated, the clamor of almost any group
of neighbors displaying irrational, extreme deprival superreaction over some
trifle in a zoning hearing is not a pretty thing to watch. Such bad behavior
drives some people from the zoning field. I once bought some golf clubs from
an artisan who was formerly a lawyer. When I asked him what kind of law he
had practiced, I expected to hear him say, "divorce law" But his answer was,
"zoning law.“
Deprival Superreaction Tendency has ghastly effects in labor relations. Most of
the deaths in the labor strife that occurred before World War I came when
employers tried to reduce wages. Nowadays, we see fewer deaths and more
occasions when whole companies disappear, as competition requires either
takeaways from labor — which it will not consent to — or death of the
business. Deprival Superreaction Tendency causes much of this labor
resistance, often in cases where it would be in labor's interest to make a
different decision.
In contexts other than labor relations, takeaways are also difficult to get. Many
tragedies, therefore, occur that would have been avoided had there been
more rationality and less subconscious heed of the imperative from Deprival
Superreaction Tendency.
Deprival Superreaction Tendency and Inconsistency-Avoidance Tendency
often join to cause one form of business failure. In this form of ruin, a man
gradually uses up all his good assets in a fruitless attempt to rescue a big
venture going bad. One of the best antidotes to this folly is good poker skill
Additional Information on Cognitive Biases by Alireza Etemadi
learned young. The teaching value of poker demonstrates that not all effective
teaching occurs on a standard academic path.
Deprival Superreaction Tendency is also a huge contributor to ruin from
compulsion to gamble. First, it causes the gambler to have a passion to get
even once he has suffered loss, and the passion grows with the loss. Second,
the most addictive forms of gambling provide a lot of near misses and each
one triggers Deprival Super-reaction Tendency. Some slot machine creators
are vicious in exploiting this weakness of man. Electronic machines enable
these creators to produce a lot of meaningless bar-bar-lemon results that
greatly increase play by fools who think they have very nearly won large
rewards.
Deprival Superreaction Tendency often does much damage to man in open-
outcry auctions. The "social proof' that we will next consider tends to convince
man that the last price from another bidder was reasonable, and then Deprival
Superreaction Tendency prompts him strongly to top the last bid. The best
antidote to being thus triggered into paying foolish prices at open-outcry
auctions is the simple Buffett practice: Don't go to such auctions.
I myself, the would-be instructor here, many decades ago made a big mistake
caused in part by subconscious operation of my Deprival Superreaction Ten-
dency. A friendly broker called and offered me 300 shares of ridiculously
under priced, very thinly traded Belridge Oil at $115 per share, which I
purchased using cash I had on hand. The next day, he offered me 1,500 more
shares at the same price, which I declined to buy, partly because I could only
have made the purchase had I sold something or borrowed the required
$173,000. This was a very irrational decision. I was a well-to-do man with no
debt; there was no risk of loss; and similar no risk opportunities were not likely
to come along. Within two years, Belridge Oil sold out to Shell at a price of
about $3,700 per share, which made me about $5.4 million poorer than I
would have been had I then been psychologically acute. As this tale
demonstrates, psychological ignorance can be very expensive.
Some people may question my defining Deprival Superreaction Tendency to
include reaction to profit barely missed, as in the well-documented responses
Additional Information on Cognitive Biases by Alireza Etemadi
of slot machine players. However, I believe that I haven't defined the tendency
as broadly as I should. My reason for suggesting an even broader definition is
that many Berkshire Hathaway shareholders I know never sell or give away a
single share after immense gains in market value have occurred. Some of this
reaction is caused by rational calculation, and some is, no doubt, attributable
to some combination of (1) reward superresponse, (2) "status quo bias" from
Inconsistency-Avoidance Tendency, and (3) "the endowment effect" from
Excessive Self-Regard Tendency. But I believe the single strongest irrational
explanation is a form of Deprival Superreaction Tendency. Many of these
shareholders simply can't stand the idea of having their Berkshire Hathaway
holdings smaller. Partly they dislike facing what they consider an impairment
of identity, but mostly they fear missing out on future gains from stock sold or
given away.
I place this tendency first in my discussion because almost everyone thinks he
fully recognizes how important incentives and disincentives are in changing
cognition and behavior. But this is not often so. For instance, I think I've been
in the top five percent of my age cohort almost all my adult life in
understanding the power of incentives, and yet I've always underestimated
that power. Never a year passes but I get some surprise that pushes a little
further my appreciation of incentive superpower.
One of my favorite cases about the power of incentives is the Federal Express
case. The integrity of the Federal Express system requires that all packages be
shifted rapidly among airplanes in one central airport each night. And the
system has no integrity for the customers if the night work shift can't
accomplish its assignment fast. And Federal Express had one hell of a time
getting the night shift to do the right thing. They tried moral suasion. They
tried everything in the world without luck. And, finally, somebody got the
happy thought that it was foolish to pay the night shift by the hour when what
the employer wanted was not maximized billable hours of employee service
but fault-free, rapid performance of a particular task. Maybe, this person
thought, if they paid the employees per shift and let all night shift employees
go home when all the planes were loaded, the system would work better. And,
lo and behold, that solution worked.
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Early in the history of Xerox, Joe Wilson, who was then in the government, had
a similar experience. He had to go back to Xerox because he couldn't
understand why its new machine was selling so poorly in relation to its older
and inferior machine. When he got back to Xerox, he found out that the
commission arrangement with the salesmen gave a large and perverse
incentive to push the inferior machine on customers, who deserved a better
result.
And then there is the case of Mark Twain's cat that, after a bad experience
with a hot stove, never again sat on a hot stove, or a cold stove either.
We should also heed the general lesson implicit in the injunction of Ben
Franklin in Poor Richard's Alma-nark: "If you would persuade, appeal to
interest and not to reason." This maxim is a wise guide to a great and simple
precaution in life: Never, ever, think about something else when you should be
thinking about the power of incentives. I once saw a very smart house counsel
for a major investment bank lose his job, with no moral fault, because he
ignored the lesson in this maxim of Franklin. This counsel failed to persuade
his client because he told him his moral duty, as correctly conceived by the
counsel, without also telling the client in vivid terms that he was very likely to
be clobbered to smithereens if he didn't behave as his counsel recommended.
As a result, both client and counsel lost their careers.
We should also remember how a foolish and willful ignorance of the
superpower of rewards caused Soviet communists to get their final result as
described by one employee: "They pretend to pay us and we pretend to
work." Perhaps the most important rule in management is "Get the incentives
right.“
But there is some limit to a desirable emphasis on incentive superpower. One
case of excess emphasis happened at Harvard, where B. F. Skinner, a
psychology professor, finally made himself ridiculous. At one time, Skinner
may have been the best-known psychology professor in the world. He partly
deserved his peak reputation because his early experiments using rats and pi-
geons were ingenious, and his results were both counterintuitive and
important. With incentives, he could cause more behavior change, culminating
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in conditioned reflexes in his rats and pigeons, than he could in any other way.
He made obvious the extreme stupidity, in dealing with children or employees,
of rewarding behavior one didn't want more of. Using food rewards, he even
caused strong superstitions, predesigned by himself, in his pigeons. He
demonstrated again and again a great recurring, generalized behavioral
algorithm in nature: "Repeat behavior that works." He also demonstrated that
prompt rewards worked much better than delayed rewards in changing and
maintaining behavior. And, once his rats and pigeons had conditioned
reflexes, caused by food rewards, he found what withdrawal pattern of
rewards kept the reflexive
behavior longest in place: random distribution. With this result, Skinner
thought he had pretty well explained man's rnisgambling compulsion
whereunder he often foolishly proceeds to ruin. But, as we shall later see when
we discuss other psychological tendencies that contribute to misgambling
compulsion, he was only partly right. Later, Skinner lost most of his personal
reputation by overclaiming for incentive superpower to the point of thinking
he could create a human utopia with it and by displaying hardly any
recognition of the power of the rest of psychology. He thus behaved like one
of Jacob Viper's truffle hounds as he tried to explain everything with incentive
effects. Nonetheless, Skinner was right in his main idea: Incentives are
superpowers. The outcome of his basic experiments will always remain in high
repute in the annals of experimental science. And his method of
monomaniacal reliance on rewards, for many decades after his death, did
more good than anything else in improving autistic children.
When I was at Harvard Law School, the professors sometimes talked about an
overfocused, Skinner-like professor at Yale Law School. They used to say:
"Poor old Eddie Blanchard, he thinks declaratory judgments will cure cancer."
Well, that's the way Skinner got with his very extreme emphasis on incentive
superpower. I always call the "Johnny-one-note" turn of mind that eventually
diminished Skinner's reputation the man with-a-hammer tendency, after the
folk saying: "To a man with only a hammer every problem looks pretty much
like a nail." Man-with-a-hammer tendency does not exempt smart people like
Blanchard and Skinner. And it won't exempt you if you don't watch out. I will
return to man-with-a-hammer tendency at various times in this talk because,
Additional Information on Cognitive Biases by Alireza Etemadi
fortunately, there are effective antidotes that reduce the ravages of what
pretty much ruined the personal reputation of the brilliant Skinner .
One of the most important consequences of incentive superpower is what I
call "incentive caused bias." A man has an acculturated nature making him a
pretty decent fellow, and yet, driven both consciously and subconsciously by
incentives, he drifts into immoral behavior in order to get what he wants, a
result he facilitates by rationalizing his bad behavior, like the salesmen at
Xerox who harmed customers in order to maximize their sales commissions.
Here, my early education involved a surgeon who over the years sent bushel
baskets full of normal gall bladders down to the pathology lab in the leading
hospital in Lincoln, Nebraska, my grandfather's town. And, with that
permissive quality control for which community hospitals are famous, many
years after this surgeon should've been removed from the medical staff, he
was. One of the doctors who participated in the removal was a family friend,
and I asked him: "Did this surgeon think, 'Here's a way for me to exercise my
talents"' — this guy was very skilled technically — "'and make a high living by
doing a few maimings and murders every year in the course of routine fraud?"'
And my friend answered: "Hell no, Charlie. He thought that the gall bladder
was the source of all medical evil, and, if you really loved your patients, you
couldn't get that organ out rapidly enough."
Now that's an extreme case, but in lesser strength, the cognitive drift of that
surgeon is present in every profession and in every human being. And it
causes perfectly terrible behavior. Consider the presentations of brokers
selling commercial real estate and businesses. I've never seen one that I
thought was even within hailing distance of objective truth_ In my long life, I
have never seen a management consultant's report that didn't end with the
same advice: "This problem needs more management consulting services."
Widespread incentive-caused bias requires that one should often distrust, or
take with a grain of salt, the advice of one's professional advisor, even if he is
an engineer. The general antidotes here are:
1) Especially fear professional advice when it is especially good for the advisor;
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2) Learn and use the basic elements of your advisor's trade as you deal with
your advisor; and
3) Double check, disbelieve, or replace much of what you're told, to the
degree that seems appropriate after objective thought.
The power of incentives to cause rationalized, terrible behavior is also
demonstrated by Defense Department procurement history. After the Defense
Department had much truly awful experience with misbehaving contractors
motivated under contracts paying on a cost-plus-apercentage-of cost basis,
the reaction of our republic was to make it a crime for a contracting officer in
the Defense Department to sign such a contract, and not only a crime, but a
felony.
And, by the way, although the government was right to create this new felony,
much of the way the rest of the world is run, including the operation of many
law firms and a lot of other firms, is still under what is, in essence, a cost-plus-
a-percentage-of-cost reward system. And human nature, bedeviled by
incentive-caused bias, causes a lot of ghastly abuse under these standard
incentive patterns of the world. And many of the people who are behaving
terribly you would be glad to have married into your family, compared to what
you're otherwise likely to get.
Now there are huge implications from the fact that the human mind is put
together this way_ One implication is that people who create things like cash
registers, which make dishonest behavior hard to accomplish, are some of the
effective saints of our civilization because, as Skinner so well knew, bad
behavior is intensely habit-forming when it is rewarded.
And so the cash register was a great moral instrument when it was created.
And, by the way, Patterson, the great evangelist of the cash register, knew that
from his own experience. He had a little store, and his employees were
stealing him blind, so that he never made any money. Then people sold him a
couple of cash registers, and his store went to profit immediately. He promptly
closed the store and went into the cash register business, creating what
became the mighty National Cash Register Company, one of the glories of its
